REPORT ON EXAMINATION
OF THE
ERIE INSURANCE COMPANY OF NEW YORK
AS OF
DECEMBER 31, 2002
DATE OF REPORT FEBRUARY 27, 2004
EXAMINER DEBORAH SEXTON
TABLE OF CONTENTS
ITEM PAGE NO. 1. Scope of examination 2
2. Description of Company 3
A. Management 3 B. Territory and plan of operation 5 C. Reinsurance 7 D. Holding company system 8 E. Abandoned Property Law 9 F. Significant operating ratios 10 G. Accounts and records 10
3. Financial statements 12
A Balance sheet 12 B. Underwriting and investment exhibit 14 C. Capital and surplus account 15
4. Losses and loss adjustment expenses 16 5. Market conduct activities 16 6. Compliance with prior report on examination 17 7. Summary of comments and recommendations 17
STATE OF NEW YORK
INSURANCE DEPARTMENT 25 BEAVER STREET
NEW YORK, NEW YORK 10004
February 27, 2004
Honorable Gregory V. Serio Superintendent of Insurance Albany, New York 12257 Sir: Pursuant to the requirements of the New York Insurance Law, and in compliance with the
instructions contained in Appointment Number 22038 dated April 2, 2003 attached hereto, I have made an
examination into the condition and affairs of Erie Insurance Company of New York as of December 31,
2002, and submit the following report thereon:
Wherever the designations “the Company” or “Erie of NY” appear herein without qualification,
they should be understood to indicate Erie Insurance Company of New York.
The examination was conducted at the Company‘s administrative offices located at 100 Erie
Insurance Place, Erie, Pennsylvania.
Wherever the term “Department” appears herein without qualification, it should be
understood to mean the New York Insurance Department.
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1. SCOPE OF EXAMINATION
The previous examination was conducted as of December 31, 1997. This examination covered the
five-year period from January 1, 1998 through December 31, 2002. Transactions occurring subsequent to
this period were reviewed where deemed appropriate by the examiner.
The examination comprised a complete verification of assets and liabilities as of December 31,
2002. The examination included a review of income, disbursements and Company records deemed
necessary to accomplish such analysis or verification and utilized, to the extent considered appropriate,
work performed by the Company’s independent public accountants. A review or audit was also made of
the following items as called for in the Examiners Handbook of the National Association of Insurance
Commissioners:
History of Company Management and control Corporate records Fidelity bond and other insurance Territory and plan of operation Growth of Company Business in force by states Loss experience Reinsurance Accounts and records Financial statements
A review was also made to ascertain what action was taken by the Company with regard to
comments and recommendations contained in the prior report on examination.
This report on examination is confined to financial statements and comments on those matters,
which involve departures from laws, regulations or rules, or which are deemed to require explanation or
description.
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2. DESCRIPTION OF COMPANY
The Company was incorporated under the laws of the state of New York on September 18, 1885,
as the Co-operative Insurance Company of Western New York and began operating on the same day. In
1982, the Company became an advance premium co-operative. In May 1992, the Company converted to
a stock property and casualty company pursuant to Section 7307 of the New York Insurance Law. In
April 1994, the Company changed its name to Erie Insurance Company of New York and became a
wholly-owned subsidiary of Erie Insurance Company, a Pennsylvania company. Both companies are part
of the Erie Insurance Group, which also includes Erie Indemnity and Erie Insurance Exchange, both
domiciled in Pennsylvania.
As of December 31, 2002, the Company had paid in capital of $2,350,000, consisting of 23,500
outstanding common shares at a par value of $100 per share as well as gross paid in surplus of
$4,150,000.
A. Management
Pursuant to the Company’s charter and by-laws, management of the Company is vested in a board
of directors consisting of not less than thirteen nor more than twenty-three members. The board met five
times during each calendar year. At December 31, 2002, the board of directors was comprised of the
following eleven members:
Name and Residence
Principal Business Affiliation
J. Ralph Borneman, Jr. Boyerstown, PA
President & Chief Executive Officer, Body-Borneman Associated Insurance Agency
John J. Brinling, Jr. Erie, PA
Executive Vice President, Erie Family Life Insurance Company
Philip A. Garcia Erie, PA
Executive Vice President & Chief Financial Officer,
Erie Insurance Company of New York
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Name and Residence
Principal Business Affiliation
F. William Hirt Erie, PA
Chairman of the Board, Erie Insurance Company of New York
George R. Lucore Erie, PA
Senior Vice President, Erie Insurance Group
Jeffrey A. Ludrof Erie, PA
President & Chief Executive Officer, Erie Insurance Company of New York
Charles A. Markham Gowanda , NY
Retired Director-Secretary, and Financial Vice President, Professional Insurance Association of New York
John M. Peterson Erie, PA
Retired President & Chief Executive Officer, Erie Insurance Group
James J. Tanous Buffalo, NY
Attorney, Jaeckle, Flieshman & Mugel
Jan R. Van Gorder Erie, PA
Executive Vice President & General Counsel, Erie Insurance Group
Douglas F. Ziegler Erie, PA
Senior Vice President, Treasurer & Chief Investment Officer, Erie Insurance Company of New York
As indicated above, the board of directors consisted of eleven members as of the examination date.
The Company's by-laws require a minimum of thirteen directors at all times. Additionally, Section
1202(a) of the New York Insurance Law provides that:
“(1) ... the number of directors shall be fixed by the by-laws, or if not so fixed, by action of the directors. (2) If not otherwise fixed under this article, the number shall be thirteen...”
Additionally, Section 1201(a)(5)(B)(vi) requires that at least three board members be residents of
New York State. As of the examination date, only two board members met that statutory requirement.
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It is recommended that the Company comply with the above cited sections of the New York
Insurance Law, as well as its by-laws, relative to the number and residency requirements of directors on
its board.
Subsequently, it was noted that the Company appointed two additional directors by June 2003 and
that one of the new directors does reside in New York, fulfilling the requirement of the aforementioned
Section 1201(a)(5)(B)(vi) of the New York Insurance Law, as amended.
Examination review of the minutes of the board of directors' meetings held during the examination
period indicated that the meetings were well attended.
As of December 31, 2002, the principal officers of the Company were as follows:
Name Title
Jeffrey Ludrof President & Chief Executive Officer Jan Reid Van Gorder Sr. Executive Vice President, Secretary& General
CounselPhilip A. Garcia Executive Vice President & Chief Financial Officer Douglas Frank Ziegler Senior Vice President, Treasurer & Chief
Investment Officer
B. Territory and Plan of Operation As of December 31, 2002, the Company was licensed to transact business in New York and
Pennsylvania.
As of the examination date, the Company was authorized to transact the kinds of insurance as
defined in the following numbered paragraphs of Section 1113(a) of the New York Insurance Law:
Paragraph Kind of Insurance
4 Fire 5 Miscellaneous property damage 6 Water damage 7 Burglary and theft 8 Glass
6 Paragraph Kind of Insurance
9 Boiler and machinery 10 Elevator 11 Animal 12 Collision 13 Personal injury liability 14 Property damage liability 15 Workers’ compensation and employers’ liability 16 Fidelity and surety 19 Motor vehicle and aircraft physical damage 20 Marine and inland marine
The Company was also licensed as of December 31, 2002, to transact such workers’ compensation
insurance as may be incident to coverages contemplated under Paragraph 20 of Section 1113(a) of the
New York Insurance Law including insurances described in the Longshoremen’s and Harbor Workers’
Compensation Act (Public Law No. 803, 69 Congress as amended; 33 USC Section 901 et seq. as
amended).
Based on the lines of business for which the Company is licensed and the Company’s current
capital structure, and pursuant to the requirements of Articles 13 and 41 of the New York Insurance Law,
the Company is required to maintain a minimum surplus to policyholders in the amount of $3,300,000.
The Company primarily underwrites workers’ compensation and personal automobile insurance
policies which are produced by independent agents.
The following schedule shows the direct premiums written by the Company in total and in New
York for the period under examination:
7
DIRECT PREMIUMS WRITTEN
Calendar Year
1998 1999 2000 2001 2002
New York State $ 2,121,028 $ 2,680,250 $ 3,874,287 $ 5,625,854 $ 8,185,855
Total United States $ 7,517,089 $ 10,896,908 $ 15,635,975 $ 21,161,841 $ 26,599,571
Premiums Written in New York State as a Percentage of United
States Premiums Written
28.2% 24.6% 24.8% 26.6% 30.8%
C. Reinsurance Inter-Company Pooling Agreement
Under the terms of an inter-company pooling agreement, effective January 1, 1995, Erie Insurance
Exchange, Erie Insurance Company, and Erie Insurance Company of New York cede 100% of their
written business to the pool and assume an agreed upon participation percentage of the pooled business.
In 2002, the participation percentages were:
Erie Insurance Exchange 94.5% Erie Insurance Company 5 Erie Insurance Company of New York .5 Total 100.0% Ceded
All ceded reinsurance contracts effected during the examination period were reviewed and all
were found to contain the required standard clauses including insolvency clauses meeting the
requirements of Section 1308 of the New York Insurance Law.
The Company was a party to the following ceded reinsurance treaty in effect as of December 31,
2002:
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Treaty Cession
*All lines aggregate excess of loss 95% of the amount the net aggregate losses exceed 72.5% of net earned premium up to a maximum of 95% of 15% of net earned premium.
*The agreement is with Erie Insurance Exchange, an accredited affiliated reinsurer. This agreement was filed and non-disapproved in accordance with Section 1505 of the New York Insurance Law.
The Schedule F data as contained in the Company’s annual statements filed for the years within
the examination period was found to accurately reflect its reinsurance transactions. D. Holding Company System
The Company is a wholly-owned subsidiary of Erie Insurance Company (Pennsylvania), which is
a wholly-owned subsidiary of Erie Indemnity Company (“Erie Indemnity”), attorney-in-fact for Erie
Insurance Exchange. Through the attorney-in-fact, Erie Indemnity operates as a provider of management
services for the Erie Insurance Exchange and its affiliates and subsidiaries, including Erie Insurance
Company of New York.
A review of the holding company registration statements filed with the Department indicated that
such filings were complete and were filed in a timely manner pursuant to Article 15 of the New York
Insurance Law and Department Regulation 52. The following is a chart of the holding company system at
December 31, 2002:
H.O. Hirt Trusts 76.2%
Erie Indemnity Pennsylvania
El Holding Corp. Delaware
100%
EL SERVICE CORP Pennsylvania
100%
Erie Insurance Co. Pennsylvania
100%
Erie Insurance Co. of New York
100% New York
Erie Insurance Exchange Reciprocal Insurance
Exchange Attorney
Pennsylvania
Erie Family Life Ins. Co.
Pennsylvania 21.63% Indemnity 53.5% Exchange
Erie Property and Casualty Insurance Co. Pennsylvania
100%
Flagship City Insurance Co. 100% Exchange
Pennsylvania
21.63% 53.5%
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At December 31, 2002, the Company was a party to the following agreements with other members
of its holding company system:
1. Service Agreement
The Company is a party to a service an agreement with Erie Indemnity whereby Erie Indemnity
agreed to provide all the necessary and appropriate management services generally necessary to conduct
the business and affairs of the Company. The agreement provides for Erie Indemnity to be paid a
management fee calculated on a cost basis.
2. Cost Sharing Agreement
The Company entered into a cost sharing agreement effective on March 14, 2001, with all the
companies within the Erie Group to share costs incurred by exploring the various business opportunities
on the internet and other sources.
Both of the above mentioned agreements were filed with the New York State Insurance
Department pursuant to Section 1505 of the New York Insurance Law.
E. Abandoned Property Law Section 1316 of the New York Abandoned Property Law provides that amounts payable to a
resident of this state from a policy of insurance, if unclaimed for three years, shall be deemed to be
abandoned property. Such abandoned property shall be reported to the comptroller on or before the first
day of April each year. Such filing is required of all insurers regardless of whether or not they have any
abandoned property to report.
The Company’s abandoned property reports for the period of this examination were all filed on a
timely basis pursuant to the provisions of Section 1316 of the New York Abandoned Property Law.
10 F. Significant Operating Ratios
The following ratios have been computed as of December 31, 2002, based upon the results of this examination:
Net premiums written in 2002 to surplus as regards policyholders
1.5 to 1
Liabilities to liquid assets (cash and invested assets less investments in affiliates) 79.1%
Premiums in course of collection to surplus as regards policyholders
31%
All of the above ratios fall within the benchmark ranges set forth by the Insurance Regulatory
Information System of the National Association of Insurance Commissioners.
The underwriting ratios presented below are on an earned/incurred basis and encompass the five-
year period covered by this examination:
Amounts Ratios Losses and loss adjustment expenses $47,980,126 79.66% Other underwriting expenses 18,110,513 30.07 Net underwriting gain (loss) (5,864,933) (9.73) Premiums earned $60,225,706 100.00%
G. Accounts and Records 1. Section 325 of the New York Insurance Law Section 325 (b) of the New York Insurance Law states in part :
“A domestic insurer … may keep and maintain its books of account without this state if, in accordance with a plan adopted by its board of directors and approved by the superintendent, it maintains in this state suitable records in lieu thereof…”
The parent moved its administrative operations to Erie, Pennsylvania in 1994 upon acquiring the
Company. A plan to move the administrative operations was not filed with the Superintendent or adopted
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by its board of directors. This appears to be a violation of Section 325(b) of the New York Insurance
Law.
It was noted that the Company filed a Section 325 (b) plan with the Department subsequent to the
examination date.
2. Minimum Surplus Investments
Section 1402 of the New York Insurance Law requires that before investing in any other types of
securities, a domestic stock insurer shall invest and maintain an amount equal to the greater of its
minimum capital required by law or its minimum surplus to policyholders required to be maintained by
law in the following types of securities:
(1) Obligations of the United States or of any agency thereof provided such agency obligations are guaranteed as to principal and interest by the United States; (2) Direct obligations of this state or of any county, district or municipality thereof;
(3) Direct obligations of any state of the United States; (4) Obligations secured by first mortgage loans which meet the standards specified in
paragraph four of subsection (a) of section one thousand four hundred four of this article on property located in this state.
Additionally, not less than 60% must be invested in the types of securities set forth in (1) and
(2) above.
It was noted that as of the examination date, the Company was not holding investments
that met either the total requirement or the 60% requirement set forth in Section 1402 of the New
York Insurance Law. However, it was also noted that subsequent to the examination date, the
Company had invested in the proper qualifying securities.
It is recommended that the Company monitor its investment portfolio to ensure compliance
with all statutory requirements.
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3. FINANCIAL STATEMENTS 1. Balance Sheet
The following shows the assets, liabilities and surplus as regards policyholders as determined by
this examination and is the same as reported by the Company in its filed annual statement as of as of
December 31, 2002:
Assets
Ledger Assets
Assets Not Admitted
Admitted
Assets
Bonds $25,255,400 $25,255,400Preferred stocks 1,822,430 1,822,430Common stocks 15,992 15,992Cash 171,146 171,146Short-term investments 2,090,156 2,090,156Premiums and agents’ balances in course of collection 3,410,645 $ 39,722 3,370,923Premiums, agents’ balances and installments booked but deferred and not yet due 9,221,373
9,221,373
Funds held by or deposited with reinsured companies 18,933 18,933Reinsurance recoverables on losses and loss adjustment expenses 2,189
2,189
Federal and foreign income taxes recoverable 1,269,136 1,269,136Interest, dividends and real estate income due and accrued 408,615
408,615
Equities in pools and associations 545 545Premium tax credit 45,107 45,107Other accounts receivable 9,167 ________ 9,167
Total Assets $43,740,834 $39,722 $43,701,112
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Liabilities Losses and loss adjustment expenses $11,332,396 Reinsurance payable on paid losses 1,957,528 Contingent commissions and other similar charges 5,363 Other expenses 284 Taxes, licenses and fees 397,508 Advance premiums 100,771 Unearned premiums 6,370,938 Dividends declared and unpaid to policyholders 92,100 Ceded reinsurance premiums payable 11,454,456 Amounts withheld or retained by company for account of others 120,888 Payable to parent, subsidiaries and affiliates 924,229 2002 North Carolina private passenger auto escrow 8,716 Total liabilities $32,765,177 Surplus and Other Funds
Common capital stock $ 2,350,000 Gross paid in and contributed surplus 4,150,000 Unassigned funds 4,435,935 Surplus as regards policyholders 10,935,935 Total liabilities and surplus and other funds $43,701,112
NOTE: The Internal Revenue Service has completed its audit of the Company’s 1996 tax return. The examiner is not aware of any tax assessment and the financial report does not reflect any tax liability herein. Audits for other years are either in process or have yet to commence.
14 B. Underwriting and Investment Exhibit
Surplus as regards policyholders increased $2,630,828 during the 5-year examination period January 1, 1998 through December 31, 2002, detailed as follows:
Statement of Income Underwriting income Premiums earned
$60,225,706
Deductions: Losses and loss adjustment expenses incurred Other underwriting expenses incurred
$47,980,126 18,110,513
Total deductions 66,090,639
Net operating loss $(5,864,933)
Investment Income Net investment income earned 8,479,601 Net realized losses (192,647)
Net investment gain
8,286,954 Other Income Other income $11,894 Net loss on agents’ balances charged off (153,015)
Total other income (141,121)
Net Income before federal income taxes and dividends to policyholders
$2,280,900
Dividends to policyholders (307,881) Net income before federal income taxes $1,973,019
Federal income taxes incurred Net income
209,768
$1,763,251
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C. Capital and Surplus Account
Surplus as regards policyholders, December 31, 1997 $8,305,107 Net Income
$1,763,251
$
Net unrealized capital gains 72,179 Change in not admitted assets 27,621Change in excess statutory reserves 88,150 Cumulative effect in changes in accounting principles 734,869 _______ Total gains and losses $2,658,449 $27,621 Net increase in surplus as regards policyholders
2,630,828
Surplus as regards policyholders, December 31, 2002 Per report on examination
$10,935,935
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4. LOSSES AND LOSS ADJUSTMENT EXPENSES
The examination liability for the captioned item of $11,332,396 is the same as reported by the
Company as of December 31, 2002. The examination analysis was conducted in accordance with
generally accepted actuarial principles and practices and was based on statistical information contained in
the Company’s internal records and in its filed annual statements.
5. MARKET CONDUCT ACTIVITIES
In the course of this examination a review was conducted of the manner in which the Company
conducts its business practices and fulfills its contractual obligations to policyholders and claimants. The
review was general in nature and is not to be construed to encompass the more precise scope of a market
conduct investigation, which is the responsibility of the Market Conduct Unit of the Property Bureau of
this Department.
The general review was directed at practices of the Company in the following areas:
A. Sales and advertising B. Underwriting C. Rating D. Claims and complaint handling
No problem areas were encountered.
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6. COMPLIANCE WITH PRIOR REPORT ON EXAMINATION
The prior report on examination contained two recommendations as follows (page numbers refer
to the prior report):
ITEM PAGE NO.
A Custodial Agreement
A review of the Company’s custodial agreement revealed that it lacked most of the protective covenants and safeguards that are deemed necessary. The Company has complied with this recommendation.
10-11
B Accounts and Records It is recommended that the Company comply with the Annual Statement Instructions in the preparation of its future filed financial statements. The Company has complied with this recommendation.
11
7. SUMMARY OF COMMENTS AND RECOMMENDATIONS
ITEM PAGE NO.
A.
B.
(i)
Board of Directors It is recommended that the Company abide by the requirements of its by-laws and maintain the required number of directors and also have at least three directors that reside in New York State according to Section 1201 (a) (5) (B)(vi) of the New York Insurance Law.
It is noted that the Company appointed two additional directors by June 2003 and that one of the new directors does reside in New York.
Accounts and Records Minimum Surplus Investments It is recommended that the Company monitor its investment portfolio to ensure compliance with all statutory requirements.
5
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Respectfully submitted,
_____________________ Deborah Sexton
Senior Insurance Examiner
STATE OF NEW YORK ) )SS: ) COUNTY OF NEW YORK )
DEBORAH SEXTON being duly sworn, deposes and says that the foregoing report, subscribed to by her,
is true to the best of her knowledge and belief.
_____________________ Deborah Sexton
Subscribed and sworn to before me
this day of , 2005.